Billions of dollars worth of crypto assets are exchanged daily. To gain an edge in a market known for its unpredictable margins and patterns, many traders have turned to algorithms and bots to help them make the most of their time in the markets. This article will discuss the pros and cons of algorithmic trades to give you the information needed to make informed decisions.
Introduction to Algorithmic Trading
In crypto, algorithmic trading executes orders through pre-programmed and automated instructions. With algorithms, the guesswork and human factor are mostly eliminated; the bots do what they’re programmed to do, when they’re programmed to do it, and how they’re designed to execute these instructions.
An example of platforms that have succeeded at integrating algorithmic trades into their operations is TradingView. Such platforms allow users to experience powerful automation, dynamic parameter settings, and other features that give them an edge in the market.
To make the model a reality, human engineers combine complex formulas with mathematical models to decide on buying and selling crypto assets. High-frequency trading (HFT) is one of the features that makes bots attractive to individuals and companies in the crypto space. HFT allows thousands of trades to be executed every second, giving investors a considerable edge in a market that can change drastically in seconds.
The use of algorithms has been on the rise since the late 1900s. The New York Stock Exchange pioneered this technology with its Designated Order Turnaround (DOT) to funnel orders between traders and exchange floor specialists.
Why You Should Consider Algorithmic Trading
There are many reasons you should consider performing trades with bots. Bots help you trade in volumes that might be impossible with human traders. And they also allow you to time your position entry and exit to help you ensure profit maximization.
Bots do not have human emotions; this makes decision-making more efficient and reliable, as you’ll be sure that trades are executed based on the parameters you provide your system with.
For a platform like Tradingview, you are equipped with a computerized system where you never have to worry about entering or exiting trades early or late. As long as all parameters are set right, users can expect to always be on time in the market.
Backtesting is testing your algo trades with historical data to ascertain performance. This process can help traders understand areas of success and improvements in their strategy.
Why Algorithmic Trades Might Not Be for You
As with most things, trading with bots has its fair share of cons worth considering before deciding.
Speed of Order Execution Problems
Generally, speed of order execution is a positive in financial markets, but on more than one occasion, it has led to problematic market movements and crashes. Many industry professionals blame 2010’s flash crash on algorithmic trading.
In the crypto space, the liquidity of exchanges and traders is monitored closely. Some significant players must back up a certain amount of their crypto assets with fiat currencies. In some cases, crypto market liquidity can run out without warning because buy and sell orders may sometimes fail to correlate.
Huge Startup Costs
Building, maintaining, and managing algorithmic trading infrastructure is known to be financially restrictive. When you consider the cost of paying professionals to write the code and crunch the numbers and the cost of the digital infrastructure, most people turn towards alternatives. Fortunately, working with Algo-trading facilities is available for a fee or commission.
Best Case Practices for Algorithmic Trades
A great way to start your journey is to settle on a suitable strategy. More often than not, your ability to make a profit in the market will depend on the efficacy of your strategy.
Once you have formulated your strategy, the next step is to turn it into an algorithm and work with professionals to automate it. If you work with third parties, this is usually done on your behalf.
Acquire the Trading Software and Trade
Algorithmic traders may choose to acquire software from third-party providers or build their own. When this is done, it’s time to trade your crypto assets like never before. Your algorithm’s signals should give you an edge in the market.
Algorithmic trading is not intended to replace the human trader, especially in crypto; it’s designed to complement your trading activities. Unfortunately, some people believe that with an automated strategy, they can make “passive income” by doing little to nothing, but that couldn’t be farther from the truth. The technology behind this innovation is still developing and constantly evolving. Getting the most out of your computer-assisted strategy as a tool rather than a different entity will be in your best interest.